Iliad Group IFRS consolidated financial statements Year ended December 31, 2010 CONTENTS

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1 1 CONTENTS CONSOLIDATED INCOME STATEMENT... 3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME... 5 CONSOLIDATED BALANCE SHEET ASSETS... 6 CONSOLIDATED BALANCE SHEET EQUITY AND LIABILITIES... 7 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY... 8 CONSOLIDATED STATEMENT OF CASH FLOWS... 9 NOTE 1: ACCOUNTING PRINCIPLES... 1 NOTE 2: SCOPE OF CONSOLIDATION NOTE 3: CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS NOTE 4: REVENUES NOTE 5: PURCHASES USED IN PRODUCTION NOTE 6: HUMAN RESOURCES DATA NOTE 7: DEVELOPMENT COSTS NOTE 8 : OTHER INCOME AND EXPENSES FROM OPERATIONS NOTE 9: DEPRECIATION, AMORTIZATION AND PROVISIONS... 3 NOTE 1: OTHER OPERATING INCOME AND EXPENSE, NET NOTE 11: FINANCIAL INCOME AND EXPENSES NOTE 12: CORPORATE INCOME TAX NOTE 13: BASIC AND DILUTED EARNINGS PER SHARE NOTE 14: NOTES TO THE STATEMENT OF CASH FLOWS NOTE 15: SEGMENT INFORMATION NOTE 16: GOODWILL NOTE 17: INTANGIBLE ASSETS NOTE 18: IMPAIRMENT TESTS ON GOODWILL AND INTANGIBLE ASSETS NOTE 19: PROPERTY, PLANT AND EQUIPMENT NOTE 2: OTHER FINANCIAL ASSETS NOTE 21: INVENTORIES NOTE 22: TRADE AND OTHER RECEIVABLES... 5 NOTE 23: CASH AND CASH EQUIVALENTS NOTE 24: ASSETS HELD FOR SALE NOTE 25: EQUITY NOTE 26: STOCK OPTION PLANS NOTE 27: PROVISIONS NOTE 28: FINANCIAL LIABILITIES NOTE 29: TRADE AND OTHER PAYABLES NOTE 3: RELATED-PARTY TRANSACTIONS NOTE 31: FINANCIAL INSTRUMENTS NOTE 32: FINANCIAL RISK MANAGEMENT NOTE 33: OFF BALANCE SHEET COMMITMENTS AND CONTINGENCIES NOTE 34: EVENTS AFTER THE BALANCE SHEET DATE NOTE 35: LIST OF CONSOLIDATED COMPANIES AT DECEMBER 31, NOTE 36: LIST OF CONSOLIDATED COMPANIES AT DECEMBER 31, NOTE 37: CHANGES IN SCOPE OF CONSOLIDATION AND PERCENTAGE CONTROL IN

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3 3 CONSOLIDATED INCOME STATEMENT (in thousands) Note Revenues 4 2,38,255 1,954,5 Purchases used in production Payroll costs External charges Taxes other than on income Additions to provisions Other income from operations Other expenses from operations (899,488) (14,436) (144,93) (37,251) (28,982) 23,517 (49,48) (92,336) (18,58) (153,96) (42,89) (29,29) 18,297 (56,366) EBITDA (1) 1 798, ,375 Share-based payment expense Depreciation, amortization and provisions for impairment of non-current assets 26 9 (8,117) (312,66) (7,281) (294,741) Profit from ordinary activities 477, ,353 Other operating income and expense, net 1 6,95 (26,491) Operating profit 538, ,862 Income from cash and cash equivalents Finance costs, gross Finance costs, net ,32 (44,15) (41,695) 5,613 (56,346) (5,733) Other financial income Other financial expenses (7,779) 1,724 Corporate income tax 12 (176,269) (18,995) Profit for the period before profit from discontinued operations and assets held for sale Profit, net of taxes, from discontinued operations and assets held for sale 313, ,858 1,1 PROFIT FOR THE PERIOD 313, ,868 Attributable to: Owners of the Company Minority interests Earnings per share (in ): Basic earnings per share Diluted earnings per share Earnings per share from continuing operations (in ): Basic earnings per share from continuing operations Diluted earnings per share from continuing operations ,161 (23) ,

4 4 (1) See definition on page 15

5 5 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in thousands) Note PROFIT FOR THE PERIOD 313, ,868 Fair value gains/(losses) on interest rate and currency hedging instruments, net of tax 7,274 (3,81) Total income and expenses recognized directly in equity Total comprehensive income for the period 7,274 32,412 (3,81) 172,58 Note: Minority interests have not been analyzed as they represent a non-material amount.

6 6 CONSOLIDATED BALANCE SHEET ASSETS (in thousands) Note At December 31, 21 At December 31, 29 Goodwill Intangible assets Property, plant and equipment Other long-term financial assets Deferred income tax assets Other non-current assets , ,242 1,337,119 12, , ,48 8,291 1,87,47 12, ,983 16,662 TOTAL NON-CURRENT ASSETS 1,94,389 1,62,971 Inventories Current income tax assets 698 1,18 Trade and other receivables , ,24 Other short-term financial assets 2 2, Cash and cash equivalents , ,91 TOTAL CURRENT ASSETS 516,251 82,768 ASSETS HELD FOR SALE 24 71,574 31,59 TOTAL ASSETS 2,492,214 2,455,248

7 7 CONSOLIDATED BALANCE SHEET EQUITY AND LIABILITIES (in thousands) Note At December 31, 21 At December 31, 29 Share capital 25 12,121 12,96 Additional paid-in capital 25 98,66 93,362 Retained earnings and other reserves , ,952 TOTAL EQUITY 1,78, ,41. Attributable to owners of the Company 1,77, ,873. Minority interests Long-term provisions 27 1,393 1,397 Long-term financial liabilities ,967 1,12,118 Deferred income tax liabilities 12 12,76 16,789 Other non-current liabilities 29 1,874 2,169 TOTAL NON-CURRENT LIABILITIES 1,15,994 1,14,473 Short-term provisions 27 24,357 8,88 Taxes payable 1, Trade and other payables , ,666 Short-term financial liabilities 28 36, ,66 TOTAL CURRENT LIABILITIES 397,881 55,365 TOTAL EQUITY AND LIABILITIES 2,492,214 2,455,248

8 8 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in thousands) Share capital Additional paid-in capital Own shares held Reserves Retained earnings Total equity Total equity at January 1, 29 12,62 89,121 (4,589) 2,494 48,46 597,548 Movements in 29 Profit for the period 175, ,868 Income and expenses recognized directly in equity: Impact of interest rate and currency hedges (3,81) (3,81) Total comprehensive income for the period (3,81) 175, ,58 Capital increase 34 4,241 4,275 Dividends paid by Iliad SA (18,59) (18,59) Dividends paid by subsidiaries (25) (25) Purchases/sales of own shares 1,839 1,839 Impact of stock options 7,281 7,281 Other (57) (57) Total equity at December 31, 29 12,96 93,362 (2,75) 23,98 637, ,41 Total equity at January 1, 21 12,96 93,362 (2,75) 23,98 637, ,41 Movements in 21 Profit for the period 313, ,138 Income and expenses recognized directly in equity: Impact of interest rate and currency hedges 7,274 7,274 Total comprehensive income for the period 7, ,138 32,412 Capital increase 25 5,298 5,323 Dividends paid by Iliad SA (2,174) (2,174) Dividends paid by subsidiaries (43) (43) Purchases/sales of own shares Impact of stock options 8,117 8,117 Other Total equity at December 31, 21 12,121 98,66 (2,456) 39,299 93,715 1,78,339 Note: Minority interests have not been analyzed as they represent a non-material amount.

9 9 CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) Note Profit for the period (including minority interests) 313, ,868 + / - Depreciation, amortization and provisions against non-current assets and net additions to 367, ,184 provisions for contingencies and charges (excluding restructuring costs) - / + Unrealized gains and losses on changes in fair value 3,712 (3,63) + / - Income and expenses related to stock options and other share-based payments 8,117 7,281 - / + Other income and expenses, net (1) 41 - / + Gains and losses on disposals of assets (6,844) (7,873) - / + Dilution gains and losses + / - Share of profit of associates - Dividends (investments in non-consolidated undertakings) - Restructuring costs 26,491 Cash flows from operations after finance costs, net, and income tax (excluding restructuring costs) 685, ,389 + Finance costs, net 11 41,695 5,733 + / - Income tax expense (including deferred taxes) ,269 18,995 Cash flows from operations before finance costs, net, and income tax (excluding restructuring costs) (A) 93, ,117 - Income tax paid (B) (11,68) 98,743 + / - Change in operating working capital requirement (including employee benefit obligations) 14 (17,123) (7,61) (C) = Net cash generated from operating activities before restructuring costs (D) = (A + B + C) 874, ,25 - Restructuring costs (E) (26,293) = Net cash generated from operating activities after restructuring costs (F) = (D + E) 874,887 77,957 - Acquisitions of property, plant and equipment and intangible assets 14 (783,579) (428,325) + Disposals of property, plant and equipment and intangible assets 41,148 8,728 - Acquisitions of investments in non-consolidated undertakings + Disposals of investments in non-consolidated undertakings + / - Effect of changes in Group structure acquisitions and earn-outs (3) 44,125 + / - Effect of changes in Group structure disposals + / - Change in outstanding loans and advances (418) (7,671) + Cash inflows from assets held for sale 4,714 6,276 - Cash outflows for assets held for sale + / - Other (44,23) (11,19) (2,995) = Net cash used in investing activities (G) (793,747) (397,862) + Proceeds from capital increases:. Paid by owners of the Company. Paid by minority shareholders of consolidated companies + Proceeds received on the exercise of stock options 5,739 1,56 - / + Own-share transactions 294 1,839 - Dividends paid during the period:. Dividends paid to owners of the Company (2,174) (18,59). Dividends paid to minority shareholders of consolidated companies (43) (25) + Proceeds from new borrowings 683,87 15,22 - Repayment of borrowings (including finance leases) 28 (1,9,115) (64,19) - Net interest paid (including on finance leases) (34,649) (43,4) = Net cash used in financing activities (H) (374,78) (17,136) + / - Effect of exchange-rate movements on cash and cash equivalents (I) 9 (2) = Net change in cash and cash equivalents (F + G + H + I) (292,929) 292,957 Cash and cash equivalents at beginning of year 14 63, ,441 Cash and cash equivalents at year-end ,469 63,398

10 1 NOTE 1: ACCOUNTING PRINCIPLES 1-1. GENERAL INFORMATION Iliad SA is a société anonyme registered in France and listed on Eurolist by Euronext Paris under the symbol ILD. The Company s registered office is located at 8 rue de la Ville l Evêque, 758 Paris, France. The Iliad Group is a leading operator in the French internet access and telecommunications markets. Its businesses are conducted by Free (an alternative ADSL broadband operator that uses the Free and Alice brands), Free Infrastructure (optical fiber), One.Tel (a landline telephony operator), IFW (specialized in Wimax), and Free Mobile (mobile telephony). The Board of Directors approved the consolidated financial statements for the year ended December 31, 21 on March 7, 211 and their publication date was set for March 9, 211. These financial statements will only be definitive after approval by the Company s shareholders at the Annual Shareholders Meeting scheduled to be held on May 24, APPLICABLE ACCOUNTING STANDARDS The principal accounting policies adopted for the preparation of these consolidated financial statements are set out below. Unless otherwise specified, the same policies have been consistently applied for all of the periods presented. Basis of preparation The consolidated financial statements of the Iliad Group have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union. The historical cost convention has been applied, except for financial assets and liabilities which are carried at fair value with changes in fair value recognized either directly in the income statement or in equity when hedge accounting is applied. The preparation of financial statements in compliance with IFRS requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying the Group s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3.

11 11 The following new standards, interpretations and amendments to existing standards are mandatory for the first time for the financial year beginning January 1, 21: Revised version of IFRS 3, Business Combinations (phase 2) and consequential amendments to IAS 27, Consolidated and Separate Financial Statements (effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after July 1, 29). This revised standard and amendments concern the accounting treatment to be applied for acquisitions (notably goodwill) and changes in Group structure. The Group has adopted the revised versions of IFRS 3 and IAS 27 for all business combinations occurring as from January 1, 21. These standards had no impact on the Group s 21 consolidated financial statements. The following new standards, interpretations and amendments to existing standards are mandatory for the first time for the financial year beginning January 1, 21, but did not impact the Group s financial statements: IFRIC 16, Hedges of a Net Investment in a Foreign Operation (applicable for annual periods beginning on or after July 1, 29). IFRIC 16 applies to entities that hedge the foreign currency risk arising from net investments in foreign operations and wish to qualify for hedge accounting in accordance with IAS 39. This interpretation is not relevant to the Iliad Group. IFRIC 17, Distributions of Non-cash Assets to Owners (applicable for annual periods beginning on or after July 1, 29). This interpretation applies to the following types of nonreciprocal distributions by an entity to its owners acting in their capacity as owners: (i) distributions of non-cash assets and (ii) distributions that give owners a choice of receiving either non-cash assets or a cash alternative. It is not relevant to the Iliad Group as the Company does not distribute non-cash assets to its owners. IFRIC 18, Transfers of Assets from Customers (applicable for annual periods beginning on or after July 1, 29). This interpretation applies to the accounting for transfers of items of property, plant and equipment by entities that receive such transfers from their customers. It is not relevant to Iliad as the Group does not carry out such transfers. Amendment to IAS 39, Financial Instruments: Recognition and Measurement, Eligible Hedged Items (applicable for annual periods beginning on or after July 1, 29). This amendment clarifies how the existing principles underlying hedge accounting should be applied concerning (i) inflation in a financial hedged item and (ii) purchased option hedging instruments. It is not relevant to the Iliad Group. The following new standards, interpretations and amendments to existing standards are applicable for annual periods beginning on or after January 1, 21 but are not currently relevant to the Group s operations: IFRIC 12, Service Concession Arrangements (applicable for annual periods beginning on or after January 1, 21). IFRIC 12 applies to public-to-private service concession arrangements

12 where (i) the grantor controls or regulates the services provided by the operator and (ii) the grantor controls any significant residual interest in the infrastructure at the end of the term of the arrangement. This interpretation is not relevant to the Iliad Group. Amendment to IAS 32, Classification of Rights Issues (applicable for annual periods beginning on or after February 1, 21). The purpose of this amendment is to clarify the accounting treatment for rights issues denominated in a currency other than the issuer s functional currency. It is not relevant to the Iliad Group. Amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards: Additional Exemptions for First-time Adopters (applicable for annual periods beginning on or after January 1, 21). These amendments authorize entities operating in the oil and gas sectors to use the carrying amount under their previous GAAP as the deemed cost of oil and gas assets at the date of first-time adoption of IFRS. They are not relevant to the Iliad Group. Amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards: Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters (applicable for annual periods beginning on or after July 1, 21). The purpose of these amendments is to relieve first-time adopters of IFRS from providing the comparative priorperiod information required under IFRS 7 concerning fair value measurements and liquidity risk for annual comparative periods ending before December 31, 29. It is not relevant to Iliad as the Group is not a first-time adopter of IFRS. Amendments to IFRS 2, Share-based Payment (applicable for annual periods beginning on or after January 1, 21). These amendments clarify the accounting for group cash-settled share-based payment transactions where the entity receiving the goods or services concerned has no obligation to settle the share-based payment transaction. The Iliad Group does not carry out such transactions. 12 The following revised standards have been issued but are not mandatory for the financial year beginning January 1, 21, and have not been early adopted by the Group: IAS 24 (Revised), Related Party Disclosures (applicable for annual periods beginning on or after January 1, 211). The objective of the revised IAS 24 is to ensure that an entity s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties. Management considers that this standard will not have a material impact on the presentation of Iliad s consolidated financial statements as the Group already provides disclosures on related party transactions. IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (applicable for annual periods beginning on or after July 1, 21). IFRIC 19 provides guidance on accounting for transactions where an entity issues equity instruments to a creditor of the entity to extinguish all or part of a financial liability, including how the equity instruments should be measured. Management does not consider that this interpretation will have a significant impact on the presentation of the Group s financial statements.

13 CONSOLIDATION Consolidation methods Subsidiaries Subsidiaries are entities that are controlled by the Group. Control is presumed to exist when the Group has the power to govern an entity s financial and operating policies, either directly or indirectly, so as to obtain benefits from its activities, generally accompanying a shareholding representing more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and they are deconsolidated from the date that control ceases. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The Group does not have any investments in special-purpose entities, associates or joint ventures. Eliminations on consolidation All intragroup transactions and balances are eliminated on consolidation as well as gains and losses on transactions between subsidiaries. Business combinations The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus all costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, including any minority interests. Any excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the Group s share of the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement. If the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected, the combination is accounted for using those provisional values and any adjustments made as a result of completing the initial accounting are recognized within 12 months of the acquisition date.

14 14 Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill arising on acquisitions of subsidiaries is recognized as an intangible asset. Goodwill on acquisitions of associates is included in investments in associates. Separately recognized goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Goodwill impairment losses are recorded within operating profit in the income statement, under Other operating income and expense, net. Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in euros, which is the Group s presentation currency. Unless otherwise specified, all amounts are presented in thousands of euros. Foreign currency translation Assets and liabilities of Group companies that are denominated in foreign currencies are translated into euros at the year-end rate. Income and expense items are translated at average exchange rates for the year. All resulting exchange differences are recognized directly in equity. Fiscal year-end All Group companies have a December 31 fiscal year-end PRESENTATION OF THE FINANCIAL STATEMENTS As permitted under IAS 1, Presentation of Financial Statements, the Group s income statement is presented by nature. Operating profit corresponds to profit for the period, before: financial income and expenses (as defined in Note 11); current and deferred taxes; and profit from discontinued operations and assets held for sale. Profit from ordinary activities corresponds to operating profit as defined above, before Other operating income and expense, net. These items include income and expenses which are rare,

15 unusual and infrequent, which represent material amounts and whose presentation within other items relating to ordinary activities could be misleading for users of the financial statements in their understanding of the Group s performance. The Iliad Group has presented EBITDA on a separate line in the income statement. EBITDA is a key indicator of the Group s operating performance and corresponds to profit from ordinary activities as defined above, before: depreciation, amortization and impairment of property, plant and equipment and intangible assets; and share-based payment expense SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The main accounting policies applied by the Group are as follows: Revenues Revenues from the Group s operations are recognized and presented as follows in accordance with IAS 18, Revenue: Revenues from usage of connection time are recognized in the period in which the usage takes place. Revenues from subscriptions and flat-fee packages are recognized over the period covered by the subscriptions or packages. Revenues from the sales or provision of content supplied by external parties are presented as a gross amount when the Group is deemed to be the party in the transaction with primary responsibility in relation to the end-customer. These revenues are presented net of the amounts due to the content supplier when the latter is responsible for supplying the content to the end-customer and setting the retail price. Revenues from the sale of advertising banners are spread over the period during which the banners are displayed. Revenues from website hosting activities are recognized during the period in which the service is rendered. Foreign currency transactions

16 The recognition and measurement rules for foreign currency transactions are set out in IAS 21, The Effects of Changes in Foreign Exchange Rates. In accordance with that standard, transactions denominated in foreign currencies are recorded at their value in euros at the date of the transaction. At each reporting date, foreign currency monetary items are translated at the applicable closing rate and any exchange differences are recognized in profit as follows: as operating items for commercial transactions; as financial income or expenses for financial transactions. 16 Earnings per share The Iliad Group presents basic and diluted earnings per share. Basic earnings per share is calculated by dividing attributable profit for the period by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated by adjusting the figures for attributable profit for the period and the weighted average number of shares outstanding, for the impact of all potentially dilutive equity instruments. Intangible assets Intangible assets primarily include: Development costs capitalized in accordance with IAS 38, which are amortized over the period during which the Group is expected to consume the related future economic benefits. These costs are incurred in relation to designing new equipment and are recognized as intangible assets when they relate to distinctly separate projects for which (i) the costs can be clearly identified, (ii) the technical feasibility of successfully completing the project can be demonstrated, and (iii) it is probable that future benefits will be generated. These conditions are deemed to be met when the six general criteria defined in IAS 38 are fulfilled, i.e. when the Group can demonstrate: 1) the technical feasibility of completing the intangible asset so that it will be available for use or sale; 2) its intention to complete the intangible asset and use or sell it; 3) its ability to use or sell the asset; 4) how the intangible asset will generate probable future economic benefits; 5) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; 6) its ability to measure reliably the expenditure attributable to the intangible asset during its development. Capitalized development costs are presented net of any related subsidies or research tax credits. Intangible assets acquired in connection with a business combination. These assets are recognized separately from goodwill when (i) their fair value can be measured reliably, (ii)

17 they are controlled by the Group, and (iii) they are identifiable, i.e., are separable or arise from contractual or other legal rights. Where these assets have a finite useful life they are amortized from the date they are made available for use in the same way as for intangible assets acquired separately, and an impairment loss is recorded if their carrying amount exceeds their recoverable amount. Intangible assets with indefinite useful lives are not amortized but are systematically tested for impairment on an annual basis at the year-end (December 31) or whenever there is an indication that they may be impaired. Licenses are amortized over the license period from the date when the related network is technically ready for the service to be marketed. Impairment losses recognized following impairment tests are recorded in the income statement under Other operating income and expense, net below profit from ordinary activities. Software, which is amortized on a straight-line basis over a period of one to three years. The Alice customer base, which is being amortized over a period of 12 years. 17 Property, plant and equipment Property, plant and equipment are stated at acquisition cost, including transaction expenses, or at production cost. Cost includes any expenses directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by Group Management. Depreciation is calculated by the straight-line method, based on the following estimated useful lives: Buildings 15 to 5 years Technical equipment 3 to 14 years General equipment 1 years Computer equipment 3 to 5 years Office furniture and equipment 2 to 1 years Access fees for co-location facilities used to conduct unbundling operations are depreciated over a period of 15 years. Access fees for services specific to broadband Internet operations are depreciated over four years. Amounts paid as consideration for obtaining indefeasible rights of use (IRU) on dark optical fibers are depreciated over the term of use of the fiber concerned. Modems 4 years At each reporting date, the Group assesses whether the depreciation schedules reflect the useful lives of its assets, and makes amendments where necessary.

18 18 Borrowing costs In accordance with IAS 23, borrowing costs directly attributable to the acquisition or production of a qualifying asset are included in the cost of that asset. Finance leases Material assets acquired under finance leases are capitalized in the consolidated financial statements. In accordance with IAS 17, leases are considered to be finance leases when they have the effect of transferring to the lessee substantially all the risks and rewards inherent to ownership of the asset covered by the lease. In such cases: At the commencement of the lease term, the assets acquired are recognized in the balance sheet based on the fair value of the leased property or, if lower, the present value of the minimum lease payments. They are subsequently depreciated over their useful lives. The related obligation is recorded under debt, based on the lease terms. Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. Impairment of assets Non-financial assets with indefinite useful lives are not amortized, but are tested for impairment on an annual basis at the year-end (December 31) or whenever there is an indication that they may be impaired. In assessing whether there is any indication that an asset may be impaired, the Group considers events or circumstances that suggest that significant unfavorable changes have taken place which may have a prolonged, adverse effect on the Group s economic or technological environment, or on the assumptions used on acquisition of the asset concerned. All other assets are also tested for impairment on an annual basis or whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Financial assets Financial assets held for trading are classified as financial assets at fair value through profit or loss and are recognized as current assets. Gains and losses arising from changes in the fair value of these assets are presented in the income statement. Financial assets that the Iliad Group has the intention and ability to hold to maturity are classified as held-to-maturity investments and measured at amortized cost. Gains and losses on these investments are recognized in the income statement when they are realized. Loans and receivables are also measured at amortized cost, with gains and losses recognized in the income statement when they are repaid or settled.

19 The Group s other investments are classified as available-for-sale financial assets and are measured at fair value. Changes in the fair value of available-for-sale financial assets are recognized directly in equity. When a decline in the fair value of an available-for-sale financial asset has been recognized directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognized directly in equity is removed from equity and recognized in the income statement. 19 Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Receivables Receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method. The fair value of short-term receivables with no stated interest rate is measured at the original invoice amount if the effect of discounting is immaterial. A provision for impairment of trade receivables is recorded when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The likelihood of collection is estimated based on the best possible assessment of the risk of non-recovery of the receivable concerned. Deferred taxes Deferred taxes are recognized using the liability method for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred taxes are not accounted for if they arise from initial recognition of an asset or liability in a transaction other than a business combination and there is no difference in the applicable tax and accounting treatment. Deferred taxes are determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realized or the deferred tax liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred taxes are recognized on temporary differences arising on investments in subsidiaries except where it is probable that the temporary difference will not reverse in the foreseeable future. Cash and cash equivalents

20 2 Cash and cash equivalents include cash in hand, deposits held at call with banks, short-term investments with original maturities of less than three months and highly-liquid investments in money-market mutual funds. Short-term investments are marked-to-market at each balance sheet date. Bank overdrafts are classified as current financial liabilities. Assets held for sale In accordance with IFRS 5, non-current assets that are immediately available for sale in their present condition, and whose sale is highly probable in the short/medium term are classified to Assets held for sale. These assets are presented in the balance sheet under Assets held for sale and are measured at the lower of carrying amount and fair value less costs to sell. Own shares Own shares held are recognized as a deduction from equity based on their acquisition cost. Gains and losses on the disposal of own shares held are also recorded in equity. Provisions In accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, when the Group s obligations to third parties known at the balance sheet date are certain or likely to cause an outflow of resources for the benefit of a third party, without at least equivalent consideration, a provision is recorded when the amount concerned can be estimated with sufficient reliability. Borrowings Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date, in which case they are classified as non-current liabilities. Interest-bearing borrowings Interest-bearing borrowings are initially recognized at fair value, net of directly attributable transaction costs incurred. They are subsequently measured at amortized cost. Convertible bonds The fair value of the liability component of convertible bonds is determined based on prevailing market interest rates for similar bonds with no conversion rights. This amount is recognized as a liability based on amortized cost until the liability is settled when the bonds are converted or reach maturity. The balance of the bond issue proceeds is allocated to the conversion option and recognized in equity, net of tax.

21 21 Employee benefits Other than share-based payments which are described in a specific note the only employee benefits within the Iliad Group correspond to pension benefits. In accordance with IAS 19, Employee Benefits, independent actuarial valuations of postemployment benefit obligations under defined benefit plans are made using the projected unit credit method, with benefits recognized in line with vesting. For each active participant, the benefit likely to be paid is estimated based on the rules defined in the applicable collective bargaining agreement and/or company-level agreement, using personal data projected to the standard age for payment of the benefit. The Group s total obligations toward each participant (total actuarial value of future benefits) are then calculated by multiplying the estimated benefit by an actuarial factor, which takes into account the following: assumptions concerning the employee s probability of either leaving the Group or dying before the age of payment of the benefit; the discounted value of the benefit at the valuation date. These total benefits are then allocated over each of the past and future years for which the participant accrued rights under the plan. The portion of the Group s obligation allocated to years prior to the measurement date (projected benefit obligation) corresponds to obligations for services rendered. The projected benefit obligation represents the Group s obligation existing at the balance sheet date. The individual results of the valuation are then aggregated to obtain Group-level results. Stock option plans In accordance with IFRS 2, Share-based Payment, share purchase and subscription options, employee share issues, and share grants to Group employees are measured at fair value at the grant or issue date. Calculations of the fair value of stock options are performed based on criteria such as the exercise price and life of the options, the current price of the underlying shares, the volatility range of the share price, expected dividends on the shares and the risk-free interest rate over the life of the options. The fair value of stock options is recognized under Share-based payment expense on a straight-line basis over the vesting period (i.e. the period between the grant date and the exercise date), with a corresponding adjustment to equity for equity-settled plans and to employee-related liabilities for cash-settled plans. A certain number of Group employees have been granted shares in a subsidiary subject to conditions relating to their presence within the Group. The shares are measured based on the fair value of the benefit granted to the employee on the grant date, including in particular the estimated turnover of beneficiaries, a discount in respect of the non-transferability period, and

22 the fair value of the shares at the grant date. This benefit is recognized in the income statement under Share-based payment expense, on a straight-line basis over the definitive vesting period of the shares, with a corresponding adjustment to equity. Derivative financial instruments and hedging activities Derivatives are initially recognized at fair value on the date the derivative contract is entered into and are subsequently remeasured at fair value at each balance sheet date. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the hedged item. The Group designates certain derivatives as hedges of a particular risk associated with a highly probable forecast transaction (cash flow hedges). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and hedging strategy. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows of hedged items. The fair values of the various derivative instruments used for hedging purposes are disclosed in Note 32. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item exceeds 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. The effective portion of any gain or loss from remeasuring a derivative financial instrument designated as a cash flow hedge is recognized directly in equity and the ineffective portion is recognized in the income statement. 22

23 23 NOTE 2: SCOPE OF CONSOLIDATION List of consolidated companies and consolidation methods The scope of consolidation and consolidation methods used are described in Note 35 for the year ended December 31, 21 and Note 36 for the year ended December 31, 29. CHANGES IN SCOPE OF CONSOLIDATION IN 21 Changes in the scope of consolidation in 21 as set out in the table in Note 37 concerned the following: The formation in May 21 of Iliad Gaming SAS, a simplified joint-stock company (société par actions simplifée) that is wholly owned by Iliad SA. Iliad Gaming SAS which is an online gaming and betting operator was fully consolidated in the consolidated financial statements at December 31, 21. The formation in May 21 of Call One BPO, a Moroccan company that is wholly owned by Iliad SA and was fully consolidated in the consolidated financial statements at December 31, 21. Call One BPO s corporate purpose is to (i) create and operate all activities related to call centers and (ii) supply services concerning assistance, call-outs, maintenance and equipment in the telecommunications field.

24 24 NOTE 3: CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The Group makes estimates and assumptions concerning the future. It continually evaluates these estimates and assumptions which are based both on past experience and on other factors deemed reasonable to be used for assessing the carrying amount of assets and liabilities. Actual amounts may differ significantly from these estimates should different assumptions or conditions apply. The main accounting estimates and judgments used by the Group relate to (i) useful lives and impairment of non-current assets and (ii) assessment of doubtful receivables and calculation of the corresponding provisions.

25 25 NOTE 4: REVENUES An analysis of revenues by operating segment is provided in Note 15. As substantially all of the Group s operations are conducted in France, presenting data by geographic region would not be meaningful.

26 26 NOTE 5: PURCHASES USED IN PRODUCTION Purchases used in production include: Interconnect costs invoiced by other operators. Costs relating to unbundling operations. Acquisitions of goods and services for resale or for use in designing goods or services invoiced by the Group.

27 27 NOTE 6: HUMAN RESOURCES DATA Payroll costs Payroll costs break down as follows: (in thousands) Wages and salaries 74,797 79,371 Payroll taxes 29,639 29,29 Total 14,436 18,58 Number of employees at year-end The Iliad Group s headcount can be analyzed as follows by category: At Dec. 31, 21 At Dec. 31, 29 Management Other 3,775 3,538 Total 4,355 4,52 Headcount by segment is presented in the Employee numbers by operating segment table in Note 15 Segment information. Post-employment benefits The methods used for recognizing and measuring pension and other post-employment benefit obligations comply with IAS 19, Employee Benefits (see Note 1). Post-employment benefit obligations totaled 1,874, at December 31, 21, compared with 1,256, at December 31, 29. The following main economic assumptions were used to measure the Group s post-employment benefit obligation at December 31, 21 and 29: Discount rate Inflation rate Salary growth rate Mortality table Type of retirement Retirement age - Management - Other 4.75% 2% 3% INSEE Voluntary Statutory retirement age post 21 French pension reform 5 % 2 % 3 % INSEE Voluntary 62 years 6 years

28 28 NOTE 7: DEVELOPMENT COSTS Development costs include the following: The cost of designing new products, tailoring existing products to the Internet, and researching or creating databases for new applications (see Note 1). These costs are primarily incurred by Freebox. Specific development costs relating to the process for laying optical fiber. These costs are mainly incurred by Free Infrastructure. As from 21, the technological development costs incurred in the mobile telephony business, notably concerning the network s architecture and functionalities. Development costs that are recognized directly in the income statement are presented net of any related research tax credits. (in thousands) Amortization of capitalized development costs 788 1,66 Development costs recognized directly in the 1, income statement Total 2,76 1,92

29 29 NOTE 8 : OTHER INCOME AND EXPENSES FROM OPERATIONS Other income from operations breaks down as follows: (in thousands) Proceeds from sales of non-current assets 17,682 8,728. Other 5,835 9,569 Total other income from operations 23,517 18,297 Other expenses from operations can be analyzed as follows: (in thousands) Carrying amount of divested non-current assets (1,838) (1,865). Royalties and similar fees (34,441) (37,72). Bad debts (2,231) (11,415). Other (1,898) (5,366) Total other expenses from operations (49,48) (56,366)

30 3 NOTE 9: DEPRECIATION, AMORTIZATION AND PROVISIONS The following tables show the breakdown between the various components of depreciation, amortization and provisions: Depreciation, amortization and provisions for impairment of non-current assets (in thousands) Depreciation and amortization expense:. Intangible assets 4,773 15,567. Property, plant and equipment 38,64 278,631 Provisions for impairment of property, plant and equipment 127 1,1 Amortization of investment grants recognized as intangible assets (898) (458) Total 312,66 294,741 The high level of depreciation of property, plant and equipment reflects the major capital expenditure projects carried out by the Group in recent years. Additions to other provisions (in thousands) Provisions for contingencies and charges 61 (1,65) Provisions for impairment of inventories and trade receivables 28,372 3,94 Total 28,982 29,29

31 31 NOTE 1: OTHER OPERATING INCOME AND EXPENSE, NET This item represented net income of 6,95, in 21, compared with a net expense of 26,491, in 29. Comments on the 21 figure The 6.9 million in net income recorded under Other operating income and expense, net in 21 reflects the combined impact of: 125 million in non-recurring income. A 4 million write-down of the Wimax license, reflecting the Group's assessment of its likely future use. Additions to provisions for claims and litigation and general contingencies to reflect unfavorable changes in certain situations for the Group during the year. Comments on the 29 figure Following the acquisition of Liberty Surf Group, as from 28 Iliad incurred costs for (i) restructuring the operations conducted under the Alice brand with a view to returning them to breakeven and (ii) combining these operations with Free s business. In 28, the Group decided to disclose these restructuring costs separately as they represented a material non-recurring amount. In 29 these restructuring costs primarily concerned: Expenses incurred to combine the IT systems and other technical tools of Telecom Italia SAS and Free SAS and render them compatible, as well as the commercial impact of the difficulties arising from these operations. An additional provision recorded for the Redeployment Plan decided on in late 28. Costs caused by renegotiating or terminating contracts.

32 32 NOTE 11: FINANCIAL INCOME AND EXPENSES Financial income and expenses can be analyzed as follows: (in thousands) Income from cash and cash equivalents 2,32 5,613 Finance costs, gross (44,15) (56,346) Finance costs, net (41,695) (5,733) Other financial income and expenses. Translation adjustments/hedging expense (7,824) 148. Other 45 1,576 Net financial expense (49,474) (49,9) The increase in the net financial expense figure in 21 reflects (i) the cost of setting up the Group s syndicated credit facility (see Note 28), and (ii) lower returns from short-term investments. Income from cash and cash equivalents corresponds to income from short-term investments. Finance costs, gross, comprises interest on borrowings and finance leases. The expense for the year relating to the Group s OCEANE bonds includes interest payable both on the bonds and on the bond premium.

33 33 NOTE 12: CORPORATE INCOME TAX Analysis of the corporate income tax charge The corporate income tax charge breaks down as follows: (in thousands) Current taxes on income (7,842) (15,773) Deferred taxes on income on value added (CVAE) 189,564 (5,453) 17,979 16,789 Total tax charge 176,269 18,995 Tax group The Iliad Group has set up a tax group, which at end-21 included all consolidated companies except for (i) companies that are less than 95%-owned by the Group, (ii) companies that were set up in 21, and (iii) companies whose registered office is outside France. Tax proof The table below reconciles the Group s theoretical tax rate with the effective tax rate calculated on consolidated profit from continuing operations before tax. Profit for the period , ,868 Corporate income tax Profit, net of taxes, from discontinued operations 176,269 18,995 (1,1) Consolidated profit from continuing operations before tax 489,47 283,853 Theoretical tax rate Net impact of permanent differences Impact of unrecognized tax loss carryforwards Impact of different tax rates Other impacts Effective tax rate 34.43%.18%.11%.2% 1.28% 36.2% 34.43% -.37%.6%.1% 4.27% 38.4%